France, Spain, Italy Face EU Probe Into Economic Imbalances

France, Spain and Italy are among
countries facing in-depth European Union probes into their
economic imbalances that have contributed to the region’s
financial crisis.

“There are positive signs that the re-balancing of the EU
economies is progressing,” the European Commission said today
in a statement. Yet the “necessary adjustment for some
countries with large current account deficits is still
considerable” and needs to be enhanced, it said.

Trade imbalances and their resulting deficits are among the
underlying reasons for the financial crisis that began in 2007
in the U.S. and later spread to Europe. The commission’s
investigations are part of the tougher economic monitoring
introduced in the euro area in the wake of the sovereign debt
turmoil and countries that fail to correct “excessive”
distortions can, at a later stage, be fined by the EU.

France, which has so far largely escaped bond market
pressure, is drawing increasing criticism from organizations
such as the commission and International Monetary Fund for lack
of effort to revamp its economy to improve its trade position.
The commission said today it will deepen an examination of early
warning signs it began in May.

“France has continued losing export market shares,
although at a slower pace and the indicator is well beyond the
threshold,” the commission said. “The losses are set to
continue looking forward if decisive policy action is not
taken.”

Increased Scrutiny

Neighboring Spain and Italy, which saw borrowing costs
surge earlier this year, will also be subject to increased
scrutiny from Brussels.

In Spain, “decreasing unit labor costs and some
depreciation in the real effective exchange rate contribute to
recover part of the loss of competitiveness accumulated during
the boom cycle,” the commission said. “While the adjustment of
flows is ongoing, the stock of external liabilities remains
significant” and the accumulated external debt means the
“economy is exposed to liquidity risks.”

For Italy, which won praise for trying to increase
competition and overhaul taxation, as well as for moving toward
a trade surplus in 2012, the key concerns are productivity and
government debt, according to the commission.

“Weak productivity developments remain an obstacle to
lasting improvement in Italy’s competitiveness position and
growth outlook,” the commission said. “The high government
debt remains a major burden,” especially because growth remains
slow, it added.